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Why our financial literacy matters

Why our financial literacy matters

Why our financial literacy matters.

While knowledge is power, the lack of knowledge can leave us vulnerable in many areas of life.

This is especially true when it comes to our relationship with money.

Financial literacy is the missing building block undermining many people’s financial capability and personal financial position, invariably leading to chronic financial stress issues.

According to the Global Financial Literacy Excellence Center, the research found that financial stress and anxiety are highly linked to low levels of financial literacy, problematic financial behaviours and decreased financial security.

The situation has worsened during the pandemic.

It is also widely accepted women have lower levels of financial literacy than men, including in Australia which is in the top 10 nations for financial literacy.

In Australia, 63% of men and 48% of women demonstrate an understanding of at least three basic financial literacy concepts, according to data collected in the national Household, Income and Labour Dynamics in Australia (HILDA) survey.

Questions asked of respondents in the HILDA survey were:

Q1: Interest Rate

“Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?”

Q2: Inflation

“Imagine now that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, the same as today, or less than today with the money in this account?”

Q3: Diversification

“Buying shares in a single company usually provides a safer return than buying shares in a number of different companies.” [True or False]

Q4: Risk

“An investment with a high return is likely to be high risk.” [True, False]

Q5: Money Illusion

“Suppose that by the year 2020 your income has doubled, but the prices of all of the things you buy have also doubled. In 2020, will you be able to buy more than today, exactly the same as today, or less than today with your income?”

If understanding three basic financial literacy concepts can be considered financially literate, then these statistics suggest that around 8.5 million (or 45%) adults in Australia are financially illiterate

But few of us want to talk about the reality of financial capability – or our financial incapability, as the case may be.

Sadly, there is considerable shame associated with saying ‘I don’t understand how my Afterpay works, or my credit card statements, let alone how to effectively manage something as complex as share trading, as detailed as the fine print in a product disclosure statement or as expensive as a 30-year mortgage.

Many of us don’t even truly understand how our phone plans work, or what everything on our payslips means.

According to findings from the United States’ National Financial Capability Study, just 34% of Americans can answer four or five questions on a basic five-question financial literacy quiz correctly.

‘Study participants were asked five questions covering aspects of economics and finance encountered in everyday life, such as compound interest, inflation, principles relating to risk and diversification, the relationship between bond prices and interest rates, and the impact that a shorter-term can have on total interest payments over the life of a mortgage.’

‘Individuals need at least a fundamental level of financial knowledge. This knowledge, paired with financial decision-making skills, can best ensure an individual’s financial capability.’

It’s human nature to want to ‘set and forget’ complex financial issues, and too much product and service marketing leave us with the comforting but untrue idea that we can do that.

Financial instruments, personal situations all change – so our actions around finances must change too. Big companies are nimble and unless we want to pay too much, we need to at least understand that our personal financial decisions need to be flexible and we must be prepared to embrace changes in our finances.

But how do we know where to start?

But as the saying goes, we don’t know what we don’t know.

Financial mindfulness is a state of awareness and attention to your finances and financial behaviours that can support the growth of your financial literacy.

It is not the answer to a lack of financial literacy, but it can help us see reality and feel motivated to learn.

A key part of mindfulness is to observe our thoughts, feelings and behaviours as they are – not how we think they should be. This allows us to see the world as it is, rather than just accepting autopilot as a life-long strategy.

In the context of personal finances, developing financial mindfulness is a clear and useful step towards improving financial literacy.

In the second part of this two-part series, we will look at a range of clear steps to improve your financial literacy.

Next week: Ten steps to increase your financial literacy.

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New clinical help on the horizon for shopalcoholics

New clinical help on the horizon for shopalcoholics

New clinical help on the horizon for shopalcoholics.

We all instinctively know that compulsive, mindless spending can be a problem.

We see it in those around us and even in ourselves at times – especially when stress drives the perceived need to ‘escape’ mentally.

Whatever is behind compulsive shopping, buying, spending, even shopalcoholism – whatever we call it – it can and does result in unnecessary financial stress and even distress if the behaviour goes on uninterrupted.

Financial stress is a condition that can respond positively to a mindfulness program, especially when coupled with other interventions, such as improved goal-setting, financial literacy, and behavioural tools.

These combined can help sufferers produce a preferred state of financial mindfulness.

But not many people realise compulsive shopping has also been described in clinical settings since the early 20th century – more than 100 years.

Despite this, until now there has been no officially recognised diagnosis for the disorder.

That seems surprising how commonplace it appears to be, and how it is widely accepted as growing and as a contributor to issues like personal debt and overconsumption at personal and even macro levels.

Now science has moved a step closer to being able to help people with this behaviour – which is finally being recognised as a condition to be treated.

Flinders University reports that for the first time, world experts in psychology have built a framework to diagnose Compulsive Buying-Shopping Disorder.

This means there could be new pathways for help for people struggling to manage their spending behaviour and mental wellbeing.

The framework, published in the internationally recognised Journal of Behavioral Addictions, confirms that compulsive over-spending can be regarded as a disorder.

The news gives researchers and clinicians tools to design targeted interventions for this potentially devastating condition.

The new guidelines, published in the Journal of Behavioral Addictions, confirm that excessive buying and shopping can be so serious as to constitute a disorder, giving researchers and clinicians new powers to develop more targeted interventions for this debilitating condition.

Evidence-based criteria for Compulsive Buying-Shopping Disorder (CBSD) will be developed by an international team, including Professor Mike Kyrios from Flinders University’s Órama Institute for Mental Health and Wellbeing and Professor Astrid Müller from the Hannover Medical School in Germany.

A study of 138 researchers and clinicians from 35 countries has begun the work.

The research was a collaboration with researchers from the Hannover Medical School at the University of Duisburg-Essen and University of Dresden in Germany funded by the German Academic Exchange Service and Universities Australia.

Professor Kyrios described the new work as a “game-changer” for research into the issue, which could underpin the development of much-needed treatments and improved diagnostic processes to follow.

“In over 20 years, since I started investigating excessive buying, there has been an absence of commonly agreed diagnostic criteria which has hampered the perceived seriousness of the problem, as well as research efforts and consequently the development of evidence-based treatments,” Professor Kyrios said.

Evidence-based treatments should now be possible with agreement on diagnostic criteria.

New diagnostic criteria include the recognition of “excessive purchasing of items without utilising them for their intended purposes”.

In the context of the criteria, excessiveness is described as “diminished control over buying/shopping”.

Another feature of the disorder is that “buying/shopping is used to regulate internal states, e.g., generating positive emotions or relieving negative mood”.

“Clients who show excessive buying behaviour commonly have difficulties in regulating their emotions, so buying or shopping is then used to feel better. Paradoxically, if someone with Compulsive Buying-Shopping Disorder goes on a shopping trip, this will briefly improve their negative feelings, but will soon lead to strong feelings of shame, guilt and embarrassment.”

The Delphi research method was used to reach a consensus from the researchers and clinicians involved in a complex psychological disorder.

“The Delphi technique is an ideal method to integrate diverse perspectives from international and interdisciplinary experts in the field of Compulsive Buying-Shopping Disorder,” says co-investigator Dr. Dan Fassnacht, Senior Lecturer in Psychology at Flinders University.

“This helped us to developed diagnostic criteria featuring large agreement among experts in the field, and is an important milestone to better understand and treat this behaviour.”

Dr. Kathina Ali, Research Fellow at Flinders University and co-investigator of the study adds: “Previously, it was difficult to compare studies without agreed criteria.”

“Now for the first time, we can start examining Compulsive Buying-Shopping Disorder more precisely which should help us improve our treatments for this disabling condition.”

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The cost of divorce and its impact on families

In a sea of couple conflict, find stability

The cost of divorce and its impact on families.

We know that divorce – the unsettling reality for one in three marriages – usually has an immense but largely immeasurable emotional impact on couples and their children.

But the financial costs can be quantified. A detailed report by the National Centre for Social and Economic Modelling for AMP (called Divorce: For Richer, For Poorer) shows a $14 billion cost to “the nation [in] government assistance payments and court costs”.

Closer to home, divorce means financial stress increases for divorced families in almost every area.

“Divorce has a significant impact on families’ financial wellbeing, whether they have children or not, both in the short and medium term,” the report found.

“While most families start to recover economically five years post-divorce, there remains a significant gap [20 per cent] in the financial well-being of divorced and married couples even five years later.”

The report found the median age of divorce for men was 45.3 years and women 42.7 years. It claimed divorce typically occurs during “couples’ prime wealth accumulation and child-rearing years”.

The division of assets caused the greatest financial stress and damage, the report concluded, with retirement looking “bleak” for divorced couples because “super balances for divorced women are 70 per cent less than married women, and 28 per cent lower for divorced men compared with married men.”

“A divorced parent aged less than 45 years has 35 per cent fewer assets than a married respondent of the same age, while a divorced parent aged 45–64 years has assets valued at only 25 per cent of those of a married parent from a similar socio-economic background.”

In the short to medium term, there were big differences in day to day expenses that could conceivably set up problems for years.

Household expenditure changed significantly before and after divorce, with the biggest differences experienced 1 to 4 years out from divorce.

For divorced men and women with dependent children, spending on items such as groceries, utilities, meals eaten out and alcohol and cigarettes increased, while money spent on clothing and footwear, repairs, maintenance and insurance dropped. The changes remained five years and more after divorce, although the disparities had eased.

The proportion of a divorced mother’s total income spent on groceries climbed 27 per cent between 1 and 4 years after a divorce, while the share of their incomes spent on utilities rose nearly 47 per cent. Their spending on health and medicines fell, while five years after divorce they were spending 45 per cent more on alcohol and tobacco.

Divorced fathers with dependent children increased their spending on education by 39 per cent inside the first 4 years of divorce. “This may reflect fathers having been the main income earner in the family and that paying for their children’s education is their main source of child support,” the report found.

But divorced dads’ spending on also alcohol and tobacco by 53 per cent inside the first four years. Their grocery spending rose by nine per cent.

The report found: “Divorced mothers are more likely to experience financial stress than divorced fathers or couple families.

One in five newly divorced mothers report they can’t afford to spend on the kids such as school clothing, leisure activities, or school trips for their children. This compares with only one in 50 newly divorced fathers.”

This may be related to the one area fathers benefited from after divorce: income. “The income of a divorced father is 26 per cent higher than the income of a … married father.

This may reflect increased job mobility in terms of location and type of work as well as an increased ability to accept higher paying work.”

The employment rate is also higher for divorced fathers than married dads five years after the divorce.

The report also claimed education outcomes for children from divorced families are slightly worse than for those families whose parents remained married.

Family breakdown increases a child’s chance of being an early school leaver (i.e. doesn’t complete year 12) by 6 per cent [and] decreases their likelihood of getting a tertiary education also by 6 per cent compared with children whose parents were married when they were 14 years of age.